Dimon’s influence at the Fed questioned

Scores of federal regulators are stationed inside JPMorgan Chase’s Manhattan headquarters, but none was assigned to the powerful unit that recently disclosed a multibillion-dollar trading loss.

Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency are embedded at the largest US bank. They are typically assigned to units undertaking the greatest risks. Even as the chief investment office swelled in size and made increasingly large bets, regulators did not put any examiners in that unit’s offices in London or New York, said current and former regulators, who spoke only on condition of anonymity.

After the financial crisis, senior bank executives assured watchdogs that the chief investment office was not taking risks that would cause concern, people briefed on the matter said. Just weeks before the losses became public, bank officials also dismissed the worry of a senior New York Fed examiner about the size of bets, said Fed officials.

The lapses have raised questions about who was policing the chief investment office and whether regulators were independent. Instead of putting the JPMorgan unit under regular watch, the comptroller’s office and the Fed chose to examine it periodically.

The bank push-back also suggests JPMorgan had sway over its regulators, an influence that several said was enhanced by the bank’s charismatic chief executive, Jamie Dimon, long considered Washington’s favourite banker.

As regulators scramble to determine whether the chief investment office took inappropriate risks, some former Fed officials are asking whether the investigation should be spearheaded by the New York Fed, where Mr Dimon is on the board. Some lawmakers and former regulators also have reservations about the comptroller’s office, which is investigating the trade and was the unit’s primary regulator.

“The central question is why Jamie Dimon was able to so successfully convince both its regulators that there was nothing to see at the chief investment office," said Mark Williams, a Boston University finance professor, who served as a Federal Reserve examiner. “To me, it suggests that he is too close to his regulators."

Regulators, for their part, said they could not micro-manage a bank or outlaw its risk-taking and did not bow to bank pressure when assigning examiners. New York Fed president William Dudley has said JPMorgan’s losses did not pose a threat to the bank’s viability. In a statement on Friday, the comptroller of the currency, Thomas Curry, said: “I am committed to ensuring this agency provides strong supervision for all of the institutions we oversee."

Related Quotes

Company Profile

Regulators are not typically stationed at divisions such as JPMorgan’s chief investment office, which are known as Treasury units. The units hedge risk and invest extra money on hand, and tend to make short-term investments. But JPMorgan’s office, with a portfolio of nearly $US400 billion, had become a profit centre that made large bets and recorded $US5 billion in profit over the three years to 2011.

Officials of JPMorgan declined to comment on its relationships with regulators.

Long before the recent trading blunder, JPMorgan had a pattern of pushing back on regulators, said more than a dozen current and former regulators interviewed for this article. That resistance increased after Mr Dimon steered JPMorgan through the financial crisis in better shape than virtually all its rivals.

“JPMorgan has been screaming bloody murder about not needing regulators hovering, especially in their London office," said a former examiner embedded at the bank, adding, in reference to Mr Dimon, “But he was trusted because he had done so well through the turmoil."

Even now, executives at JPMorgan disagree with some regulators over how quickly the bank should unwind the soured trade, said people briefed on the negotiations. JPMorgan would like to be done with the bad bet that has resulted in at least $US3 billion in losses, but senior executives argue it is a delicate process, especially as traders and hedge funds on the opposite side of the trade know JPMorgan is under pressure to exit the position.

Senior staff members at the Federal Reserve want the bank out of the position “yesterday", said a regulator privy to the discussions, who insisted on anonymity because the talks are private.

Some politicians – including Senator Bernard Sanders, independent of Vermont, and Elizabeth Warren, a Democrat running for the Senate in Massachusetts – argue that Dimon’s position at the New York Fed further compromises regulatory oversight. “Mr Dimon should not be in a position to have such influence on a major regulator," Ms Warren said. When asked on PBS’s NewsHour last week about JPMorgan, Treasury Secretary
Timothy Geithner
said regulators needed to “be above any political influence". He did not say Mr Dimon should resign from the Fed, but he acknowledged the perception of a conflict was “a problem".

At the bank’s annual shareholder meeting last week in Tampa, Florida, Mr Dimon pointed out that he served as an economic adviser at the New York Fed. Bankers who sit on the New York Fed do not have a say about the supervision of banks or the writing of rules, but provide guidance on the state of the economy, said Fed officials. Mr Dimon, however, has been a vocal critic of some bank regulatory reforms being drafted in Washington.

Current and former regulators said lower-level officials at JPMorgan had at times tried to undermine their supervision of the bank. JPMorgan has a reputation for challenging regulators more forcefully than rival banks such as Citigroup and Goldman Sachs, former New York Fed officials said. Long before the recent trade, an embedded examiner said he had asked for JPMorgan’s three- to five-year capital plan and, after waiting a couple of days, was told the bank’s management had gone over his head and “already sent it to my bosses". By cutting out lower-level regulators, the bank officials telegraphed a message that those concerns were irrelevant, the former examiner said.

JPMorgan also kept its regulators somewhat in the dark about the troublesome trades. Senior executives, for example, did not tell the Fed that they had changed their value-at-risk measure in the January quarter to evaluate potential losses at the chief investment office. Though reporting such a change was not required, the size of the office alone merited more oversight, said former Fed examiner Mr Williams.

“From a regulatory standpoint, it needs to be scrutinised because it was a hedge fund," Mr Williams said.

Bank officials played down the trade after it began to sour, said a senior Fed supervisor. He said he was assured in the first week of April that the bank’s senior management was not concerned about Bruno Iksil, the trader who earned the nickname the London Whale for his outsized bets in the credit markets.

The Office of the Comptroller of the Currency is also facing scrutiny about whether it is too cozy with the banks it oversees.

At JPMorgan, when media reports surfaced that the bank was making aggressive bets on credit derivatives, comptroller officials began taking a closer look, people briefed on the matter said. After thumbing through the bank’s own projections for the related risks in early April, the people said, the examiners pushed for more answers but saw no immediate need to change course. The agency notes that it does not bless specific trades.

In a briefing on Capitol Hill last week, two comptroller officials told a room of congressional staff members that it was “common" and “appropriate" for banks in general to hedge their exposure to various risks, said people who attended.

“I know in college they teach you everything is black and white," one official said in response to hypothetical questions about creating the perfect hedge. “But it’s not that way in the real world."